Author: Prince
Translator: Block unicorn
Summary: The failure of fixed-rate lending is not solely due to DeFi users rejecting it. Another reason for its failure is that protocols designed credit products based on assumptions from money markets and then deployed them into an ecosystem optimized for liquidity. The mismatch between assumed user behavior and actual capital behavior has structurally kept fixed rates in a niche position.
Today, almost all mainstream lending protocols are building fixed-rate products, primarily driven by risk-weighted assets (RWA). This is understandable. Once credit becomes closer to the real world, fixed terms and predictable payment methods become crucial.
Fixed-rate lending seems like an obvious choice. Borrowers need certainty: fixed payments, known terms, and no unexpected repricing. If DeFi is to operate like real finance, then fixed-rate lending should play a core role.
However, every cycle ultimately ends in the same way. The floating-rate money market is vast, while the fixed-rate market remains sluggish. Most "fixed" products end up performing like niche bonds held to maturity.
This is not coincidental. It reflects the composition of participants and the design of these markets.
Traditional finance (TradFi) has credit markets, while decentralized finance (DeFi) mostly has money markets
Fixed-rate lending works effectively in traditional financial systems because they are built around time. The yield curve anchors prices, and benchmark interest rate changes are relatively slow. Some institutions have clear responsibilities to hold duration, manage mismatches, and maintain solvency when funds flow in one direction.
Banks issue long-term loans (mortgages being the most obvious example) and fund them with liabilities that are not solely profit-driven capital. When interest rates change, they do not need to liquidate assets immediately. Duration management is achieved through balance sheet construction, hedging, securitization, and a deep intermediary layer specifically for risk-sharing.
The key is not the existence of fixed-rate loans, but that there will always be someone to absorb mismatches when the terms of the borrowing parties do not perfectly align.
DeFi has never built such a system.
The system built by DeFi resembles an on-demand money market. Most suppliers have a simple expectation: to earn returns on idle funds while maintaining liquidity. This preference quietly determines which products can scale.
When lenders behave like cash managers, the market will clear around products that feel like cash rather than those that feel like credit.
How DeFi lenders understand the meaning of "lending"
The most important distinction is not between fixed and floating rates, but in the commitment to withdrawal.
In floating-rate liquidity pools like Aave, suppliers receive a token that is essentially a liquidity inventory. They can withdraw funds at any time, rotate funds when better investment opportunities arise, and typically use their holdings as collateral for other assets. This optionality is the product itself.
Lenders accept slightly lower yields for this. They are not foolish. What they pay for is liquidity, composability, and the ability to reprice without additional costs.
Fixed rates disrupt this relationship. To obtain a term premium, lenders must give up flexibility and accept that funds will be locked for a period. This trade-off is sometimes reasonable, but only if the compensation is significant. In reality, the yields offered by most fixed-rate schemes are insufficient to compensate for the loss of optionality.
Why liquid collateral pulls rates toward floating rates?
Today, most large-scale cryptocurrency lending is not credit in the traditional sense. They are essentially margin and repo lending backed by highly liquid collateral. Such markets naturally settle with floating rates.
In traditional finance, repos and margin financing also undergo continuous repricing. Collateral is liquid. Risks are marked to market. Both parties expect this relationship to be adjustable at any time. The same applies to cryptocurrency lending.
This also explains a problem often overlooked by lenders.
To obtain liquidity, lenders have effectively accepted economic benefits far below what the nominal interest rate implies.
On Aave, there is a significant gap between the interest rate paid by borrowers and the income received by lenders. Part of this is protocol fees, but a large portion is due to the necessity of keeping account utilization below a certain level to ensure smooth withdrawals under stress.
Comparison of supply and demand on Aave over one year
This gap manifests as reduced yields. It is the cost that lending institutions pay to ensure a smooth exit process.
Therefore, when a fixed-rate product appears and offers a moderate premium in exchange for locking up funds, it is not competing with a neutral benchmark product but rather with a product that deliberately suppresses yields while being highly liquid and secure.
It is far more than just offering a slightly higher annual interest rate.
Why do borrowers still tolerate floating-rate markets?
Borrowers do indeed like certainty, but most on-chain lending is not like home mortgages; it involves leverage, basis trading, avoiding liquidation, collateral rotation, and strategic balance sheet management.
As Silvio Busonero demonstrated in his analysis of Aave borrowers, most on-chain debt is related to rotation and basis strategies rather than long-term financing.
These borrowers are unwilling to pay a high premium for terms because they do not intend to hold the term. They want to lock in terms when convenient and refinance when inconvenient. If interest rates are favorable, they will extend the term. If problems arise, they will quickly close their positions.
Thus, a market forms where lenders need a premium to lock up funds, but borrowers fundamentally do not want to pay that fee.
This is why the fixed-rate market continually evolves into a one-sided market.
The fixed-rate market is a one-sided market problem
The failure of fixed rates in the cryptocurrency space is often attributed to implementation issues. For example, comparisons between auctions and automated market makers (AMMs); comparisons between series contracts and liquidity pools; better yield curves; and improved user experiences.
Many different mechanisms have been tried. Term Finance runs auctions; Notional has built explicit term tools; Yield has attempted an expiration-based AMM. Aave even tried to simulate fixed-rate lending within a liquidity pool system.
The designs vary, but the outcomes converge. The deeper issue lies in the underlying mindset.
This is often where the debate shifts to market structure. Some argue that most fixed-rate protocols attempt to make credit feel like a variant of money markets. They retain liquidity pools, passive deposits, and liquidity commitments, merely changing the way interest rates are quoted. On the surface, this makes fixed rates more acceptable, but it also forces credit to inherit the limitations of money markets.
Fixed rates are not just a different interest rate; they are a different product.
At the same time, the notion that these products are designed for future user groups is only partially correct. There is an expectation that institutions, long-term depositors, and native credit borrowers will flood in and become the backbone of these markets.
But what actually flows in is more like active capital rather than balance sheets.
Institutions appear as asset allocators, strategists, and traders. Long-term depositors have never reached meaningful scale. Native credit borrowers do exist, but borrowers are not the anchors of the lending market; lenders are.
Thus, the limiting factors have never been purely a distribution issue but rather the result of the interaction between capital behavior and flawed market structures.
For fixed-rate mechanisms to operate at scale, one of the following conditions must be met:
Lenders are willing to accept that funds are locked, or
There exists a sufficiently deep secondary market where lenders can exit at reasonable prices, or
Someone holds term assets, allowing lenders to pretend they have liquidity.
DeFi lenders largely reject the first condition. The secondary market for term risk remains weak. The third condition quietly reshapes balance sheets, which is precisely what most protocols are trying to avoid.
This is why fixed-rate mechanisms are always cornered, barely able to exist, yet never able to become the default storage method for funds.
Term segmentation leads to liquidity fragmentation, and the secondary market remains weak
Fixed-rate products create terms. Term segmentation causes fragmentation.
Each term is a different instrument with different risks. A claim maturing next week is fundamentally different from one maturing three months later. If lenders want to exit early, they need someone to buy that claim at that specific point in time.
This means either:
Multiple independent liquidity pools (one for each maturity), or
A real order book with genuine market makers willing to quote across the curve.
DeFi has yet to provide a lasting version of the second option for the credit space, at least not at scale.
What we see is a familiar phenomenon: liquidity deteriorates, and price shocks increase. "Early exit" turns into "you can exit, but at a discount," and sometimes this discount can consume most of the expected returns for lenders.
Once lenders experience this, the position no longer feels like a deposit but becomes an asset that needs to be managed. Subsequently, most funds will quietly flow out.
A specific comparison: Aave vs Term Finance
Let's look at the actual flow of funds.
Aave operates on a large scale, involving billions of dollars in lending. Term Finance is well-designed and fully meets the needs of fixed-rate supporters, but its scale remains small compared to money markets. This gap is not due to brand effects but reflects the actual preferences of lenders.
On Aave v3 Ethereum, USDC providers can earn about 3% annualized yield while maintaining instant liquidity and highly composable positions. Borrowers pay an interest rate of about 5% during the same period.
In contrast, Term Finance typically completes 4-week fixed-rate USDC auctions at mid-single-digit rates, sometimes even higher, depending on collateral and conditions. On the surface, this seems more attractive.
But the key lies in the lender's perspective.
If you are a lender choosing between the two:
About 3.5% yield, akin to cash (withdraw anytime, rotate anytime, can use positions for other purposes), and
About 5% yield, akin to bonds (hold to maturity, limited exit liquidity unless other borrowers appear)
Comparison of APY between Aave and Term Finance
Many DeFi lenders choose the former, even though the latter has a higher numerical value. Because the numerical value is not the entirety of the return. Total return includes optionality.
The fixed-rate market requires DeFi lenders to act as bond buyers, while in this ecosystem, most capital is trained to be profit-driven liquidity providers.
This preference explains why liquidity is concentrated in specific areas. Once liquidity becomes insufficient, borrowers immediately feel the impact of decreased execution efficiency and limited capacity. They will revert to floating rates.
Why Fixed Rates May Never Become the Default Option in Cryptocurrency
Fixed rates can exist. They can even be healthy.
But it will not become the default choice for DeFi lenders to store funds, at least not until the lender demographic changes.
As long as most lenders expect parity liquidity, value composability over yield, and prefer positions that can adjust automatically, fixed rates will remain structurally disadvantaged.
The floating-rate market prevails because it aligns with the actual behavior of participants. They cater to money markets that seek liquid funds rather than credit markets focused on long-term balance sheets.
What Changes Need to Be Made?
For fixed rates to work, they must be viewed as credit rather than disguised as savings accounts.
Early exits must be priced, not promised. Duration risk must be explicit. When the direction of fund flows is inconsistent, someone must be willing to take on the responsibility of the other party.
The most viable solution is a hybrid model. Floating rates serve as the foundational layer for capital storage. Fixed rates act as an optional tool for those who explicitly wish to buy and sell duration.
A more realistic approach is not to forcibly introduce fixed rates into the money market but to maintain the flexibility of liquidity while providing a pathway for those seeking certainty to opt in.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
